Key takeaways
- Closing costs typically add between 2% and 5% of your total loan amount, but they can often be negotiated.
- Closing costs are separate from the mortgage unless your lender offers a no-closing-cost mortgage, where the costs are rolled into the loan.
- Closing costs vary depending on the lender, so shopping around for multiple loan estimates is critical.
If you’re trying to buy a home in 2024, you’re probably looking at the purchase price, saving for a down payment and calculating how much you’ll need each month for your mortgage bill. However, you also need to think about closing costs.
Closing costs include lender fees, transfer taxes, property taxes, title insurance policy costs, flood certification fees and more. Closing costs, which usually range from 2% to 5% of the amount you’re borrowing, are due when you finalize your mortgage and take over the property title.
If you’re interested in becoming a homeowner, be prepared to pay closing costs and research ways you might be able to lower your bill.
What are mortgage closing costs?
Closing costs, sometimes called settlement costs, are the one-time transaction fees paid to a seller before ownership of a property is transferred to a buyer. These can include small costs, such as an application fee and a credit check fee, to more sizable expenses, such as a lender origination fee (sometimes 1% of the loan amount) and real estate transfer taxes.
Many closing costs help protect you as a homeowner. An appraisal, for example, verifies that you’re not overpaying for the property, and title insurance helps avoid potential issues if someone claims they have a stake in the property.
How do closing costs work?
You’ll typically pay closing costs with a cashier’s check or wire transfer as the final step in the closing process of buying a home. While the buyer is responsible for most expenses, sellers may be on the hook for a few charges as well, including real estate agent commissions.
Moreover, sellers could voluntarily opt to make concessions, which involves paying a portion of the buyer’s closing costs out of their net proceeds from the sale.
Lenders may also offer credits to help lower your bill at the closing in exchange for an increased mortgage rate. Remember that a higher interest rate will increase your monthly payment.
How much are closing costs?
Most lenders and industry watchers will tell you that you can expect your average closing costs to be somewhere between 2% and 5% of the amount borrowed. (This figure does not reflect real estate commissions, which typically come out of the seller’s proceeds.)
Closing costs vary widely based on lender, location and the price of a home, so they can be relatively cheap or quite expensive. For example, in 2021, average closing costs were close to $2,000 in Missouri but nearly $30,000 in Washington, D.C., according to a study by CoreLogic. Since closing costs are often based on the purchase price, you’ll have more upfront costs if you buy a pricier home.
Consider these hypothetical scenarios of a homebuyer’s closing cost burden based on a 10% down payment on a $400,000 home. These examples included paying for mortgage discount points to reduce the rate, which is common in today’s high-rate environment.
| Purchase price | Down payment | Location | Closing cost estimate |
| $400,000 | 10% | Chicago | $15,207 |
| $400,000 | 10% | Denver | $11,717 |
| $400,000 | 10% | Indianapolis | $9,987 |
| $400,000 | 10% | Los Angeles | $13,582 |
What do closing costs include?
There’s no set framework for the closing costs in a real estate deal, and standard arrangements vary among states. Here are some of the most common closing costs that will show up on your closing disclosure:
Appraisal fee: A lender will require that the borrower pay for a professional appraiser to look at the property and verify its fair market value. Average cost: $356, according to Angi.
Title search fee: A fee to research the property’s history to uncover any potential title issues or outstanding liens. Average cost: Varies, but plan for at least $350.
TItle insurance: Another backup option to protect the home even after the title search is finished. Average cost: Varies widely, but the higher the purchase price, the higher the insurance policy premium.
Underwriting fee: A fee charged by a lender for their representatives to review your application and your finances. Average cost: Varies by lender; some lenders do not charge this fee.
Origination fee: The charge to originate, or create, your mortgage. Average cost: Varies, but 1% of the loan amount is fairly common.
Recording fee: The cost of entering the transfer of ownership into county records. Average cost: Varies, but likely in the $100 to $200 range.
Credit report fee: The cost of running your credit report, although not all lenders charge this expense. Average cost: Around $35.
Transfer taxes: The cost paid to the local and/or state government to actually transfer ownership from the seller to the buyer. Average cost: Varies widely. Some states do not charge a transfer tax, while others charge rates based on the property’s value.
Prepaid (discount) points: An optional charge that a buyer decides to pay to get a lower interest rate. Average cost: 1 point costs 1% of the loan amount and usually decreases your interest rate by 0.25%.
Escrow account: An account where the buyer places the next few months of property taxes and homeowners insurance to ensure these bills are paid. Average cost: Varies widely.
Real estate commissions: The fees paid to each agent involved in the deal, usually paid by the seller. Average cost: Often 3% to each agent, or 6% of the purchase price.
Attorney fee: If you hire a real estate attorney to help negotiate the contract, you’ll pay for their time at closing. Average cost: Varies.
Who pays for closing costs?
Buyers and sellers pay for closing costs, but most itemized expenses (lender, appraisal, and title search fees, for example) usually fall on the buyer’s shoulders.
A seller’s closing costs usually include the leftover costs of owning the home, such as prorated property taxes and homeowners association dues. Depending on the location, it may also be customary for the seller to pay title insurance costs for a new owner’s policy.
When do you pay closing costs?
Most closing costs are handled at closing, as the name implies. However, you may pay for some of them, such as a credit report fee or an application fee, before the final step in the closing process.
When you receive your closing disclosure, you’ll see costs separated into two columns: at closing and before closing. Any of those “before closing” entries have already been paid for.
If you don’t feel comfortable paying all your closing costs in one lump sum, you may be able to roll them into your mortgage and spread out the repayment over your loan term. However, you will wind up paying for these costs since you’ll be borrowing more money to cover them.
Can you get a no-closing-cost mortgage?
A “no-closing-cost mortgage” doesn’t mean those fees disappear. Instead, a no-closing-cost home loan means those fees will be tacked onto your mortgage balance or that you’ll be charged a steeper interest rate to cover them.
While a zero-closing-cost mortgage can be attractive if you don’t have the budget to pay thousands in upfront fees, you should consider the long-term impact on your finances. No-closing-cost mortgages inevitably end up costing more money in the long run based on a higher principal or interest rate.
How can you reduce closing costs?
If you’re about the financial burden of closing costs as a prospective homeowner, there are a few ways to get those costs under control.
Shop around
Mortgage lenders have different fee structures, so it’s critical to ask for loan estimates from at least three lenders to see who can offer you a combination of low fees and competitive interest rates.
Look for assistance
If you’re a first-time homebuyer or a buyer on a low income, there is some good news in today’s unaffordable housing market: Local towns and states have assistance programs designed to help ease the upfront burden. Some of these are called “down payment assistance programs,” but the money can be used for closing costs as well. These programs can often be paired with various mortgages, including FHA and conventional loans.
Negotiate with the seller
While much of the country is still a seller’s market, many sellers recognize the need to sweeten the deal to avoid letting a contract fall through. If you get a professional home inspection, the report can be a bargaining chip to ask the seller to cover a portion of your closing costs, particularly if the inspection reveals any repairs you may need to cover down the road.
Look for new construction
Buying a brand-new house isn’t cheap, but builders must keep buyers interested in the homes they’re developing. As an incentive for buyers, some builders offer to pay a portion of closing cost fees, while others offer rate buydowns, which help you score a lower interest rate for the first few years you own the home.
Close at the close of the month
You’ll need to prepay interest on the loan, which is typically a per-day rate. So, if you close on the last day of the month, you can significantly reduce the upfront bite of interest on your closing bill.
The bottom line
Closing costs can be significant and should be included in your homebuying budget. Knowing exactly what they include and how much they generally run can help you avoid any last-minute surprises when closing on your new home.
FAQs
In addition to paying closing costs, you’ll receive several closing documents to review.
Closing disclosure: Outlines every detail about your loan, including the closing costs you will receive at least three business days before closing.
Promissory note: A legal document stating that you will repay the loan.
Mortgage, security instrument or deed of trust: Gives the lender the right to take your property by foreclosure if you do not pay your mortgage according to agreed-upon terms.
Initial escrow disclosure statement: Details the charges you pay into an escrow each month, such as property taxes, homeowners insurance and mortgage insurance.
Right to cancel form: Outlines the rules for when and how to cancel your loan, usually used as part of the refinancing process.
According to the IRS, the only closing costs you can deduct are the discount points you pay to reduce your mortgage interest rate and the property taxes you must pay upfront. However, tax rules are constantly changing, so talk to a tax professional about what you can and can’t deduct from the closing of your house.